My colleague, Lutz Peichert, recently wrote a blog about the need for continuous risk management as it relates to your IT supplier base. While his focus was more on monitoring software and hardware vendor risk, I want to step up and remind IT services buyers the same thing. As I look at what’s happening in the steaming hot global IT services market and at the increased responsibility and access IT service providers are being given today (see Maintaining Vendor Management Vigilance In The Overheated Global Sourcing Market), I can’t help but worry that a single outage or bankruptcy or fraud or bad acquisition could spell disaster for a client. SVM executives have to continuously assess their IT services vendors’ viability and ensure that they have alternate options in case of vendor failure.
Publicly traded companies are obviously much easier to monitor due to their financial transparency; however there is still potential for fraud (as we saw with Satyam and Longtop Group) or M&A activity that may not be reported in standard sources, but that may leave customers in an unfavorable position. So, for “critical” suppliers in your portfolio, due diligence should include research outside of normal channels – social media, job websites, financial analysts (who have a pulse on M&A activity and the health of the suppliers’ revenues and profit margins).
Imagine the following: You’re about to embark on a road trip through the desert. Anyone who loves living would put the car they rely on into a repair shop prior to starting this journey to make sure that it doesn’t break at the most inappropriate moment – i.e., the middle of nowhere. Moreover, a forward looking plan should be defined to mitigate the risk of a breakdown, supported by a close monitoring of critical components of the car while riding it. Nobody would rely on only checking the receipts from prior check-ups.
However, this is what often happens when it comes to managing IT suppliers. Most companies today manage suppliers “backward” looking. When selecting a supplier, a basic check about its viability is done – if ever – and from the point of the purchase onwards companies only control the delivery. Most organizations think that contractual clauses about IP protection and exiting contracts are enough. But when do you use such clauses? And what do you do if a supplier – for whatever reason – isn’t able or willing to support you anymore?
Only a very few companies understand that there are things they need to control aside from the operational control of what is being delivered against what they pay. Companies need to check and consistently monitor the viability of their strategic suppliers. On average, 70% of the IT budget is spent with external suppliers of hard- and software services. And this investment needs to be secured. On top of this, more and more companies understand that becoming more innovative requires a closer, more strategic relationship with few suppliers.
Yesterday, SAP announced its intention to acquire business-to-business (B2B) integration provider Crossgate http://www.sap.com/index.epx#/news-reader/?articleID=17515. This was no great surprise, as SAP was already a part-owner and worked closely with the company in product development and marketing and sales activities. SAP will be able to offer a much better ePurchasing solution to customers when it has integrated Crossgate into its business, because supplier connectivity is currently a significant weakness. As I’ve written before (So Where Were The Best Run Businesses Then?), many SRM implementations rely on suppliers manually downloading PO from supplier portals or manually extracting them from emails and rekeying the data into their own systems. Not only does this cost the suppliers lots of money, it creates delays and errors that discourage users from adopting SRM.
SAP doesn’t intend to use Crossgate only for transactional processes; it also wants to develop support for wider collaboration between its customers and their supply chain partners, both upstream and downstream. That’s a sound objective, although not an easy one for SAP to achieve, because its core competence is in rigidly structured internal processes and it hasn’t done a good job to date with unstructured processes, nor with ones that go outside the enterprise’s four walls. Buyers who think they can force suppliers to comply with their edicts, just like employees do, soon end up wondering why no-one is using their ePurchasing solution.
What does the acquisition mean for sourcing professionals who are wondering where Crossgate or its competitors fit into their application strategy? My take:
A growing number of workers own personal smartphones that they might want to use for work. However, IT support costs and security implications for personal mobile devices connected to the corporate network are unclear.
As a result, sourcing and vendor management (SVM) professionals need tools to improve visibility into the real costs of their firm's mobile program. Moreover, this challenge will grow as most firms expand their bring-your-own mobile programs during the next three years.
SVMs also want tools that improve transparency and accountability around mobile work apps for things like enterprise software license compliance by personal device users. Smart SVMs at firms with many or a fast growing population of mobile information workers have already studied or are studying ways to mitigate mobile cost and security risks associated with allowing employees to use personal devices like smartphones and tablets for work.
Consumerization, strategic partnerships, and the demand from the business for emerging technologies are quickly becoming the key drivers of the Sourcing & Vendor Management (SVM) agenda. In fact, without SVM making significant changes in how it does business, many SVM teams will become irrelevant. Consider the facts:
Consumerization: Our data suggests that 33% of the information workforce (those employees who use a computer to do their job), are self provisioning technologies and applications to get their work done. What it means: SVM is no longer needed to acquire technology and services for employees.
Strategic Partnerships: Our most progressive clients are increasingly working to move their vendor relationships to outcome-based strategic partnerships where the supplier is expected to delivery innovation and value creation instead of labor, technology or services. Much of this business is being negotiated between the vendors and the business directly without the help of SVM. What it means: SVM is no longer needed to connect suppliers to the business.
Emerging Technologies: The adoption of cloud, mobile, social and video technologies continue to outpace the overall IT market. Much of this adoption is taking place within the business without the help or knowledge of IT and SVM. What it means: SVM is no longer needed to source new vendors.
Mobility, cloud, and smart computing will drive tremendous growth and significant changes in the IT industry over the next few years. My fellow analysts have brilliantly covered these topics in the past few months.
I would like to build on these views and focus more specifically on the productivity race that the IT services industry and its clients have been in during the past 10 years or so. While IT services vendors have managed to improve their output levels in order to protect margins in a market of severely eroding price points, I believe they will rapidly reach a plateau if they continue to use traditional methods. Instead, the most successful IT services firms of tomorrow will increasingly leverage disruptive methods in order to fulfill the client expectations to always “do more with less.”
Ever since the Internet bubble burst a decade ago, clients have pushed their providers to find ways to provide them with continued price decreases for similar or greater output levels. This was achieved thanks to two main levers to decrease the amount of resources required to run IT systems by end user firms:
Fewer resources: Optimizing the utilization of resources in order to reduce their consumption. For example, most projects around asset management, infrastructure standardization, consolidation, and virtualization yield the most evident returns as sources of productivity improvement. This is the case in particular in developed countries where companies need to cope with multi-layered legacy technologies that render IT systems as complex and expensive to maintain.